There used to be a television game show where the audience was encouraged to shout out to contestants to either "take the money" or "open the box". The risk in choosing the box was that it could contain either the star prize or a worthless object.
While it is perhaps unfair to draw the parallel too closely, there can be something of the same sporting risk when opening up airline industry's productivity analysis. As suggested in this column last month productivity improvements may not always prove as compelling as they seem.
The basic requirements for meaningful productivity measures are the same in the airline industry as any other. To be of use they must be; robust, accurate and, in an ideal world, have an operational application. Better still they should be predictive.
Fundamental level
At a more fundamental level, the industry also needs to ask what exactly it plans to measure and why? And what are the likely consequences of monitoring a certain type of measure? Applying a misleading test can clearly take the business in a dangerous wrong direction.
There is, of course, not one single magic measure of airline well-being. What is required is a scorecard approach that reflects the relationship between the various factors to create a productivity index. The task here is to examine the tests that should be included on that card.
Naturally, the central focus remains on labour and aircraft equipment. After all, these are among the few cost areas that an airline management can hope to influence directly. What is really at issue is the nature of the tests that are applied to these areas. Traditionally, the industry's published statistics have tended to concentrate on two key types of measure. For labour, that is capacity delivered per employee - usually in available tonne kilometres (ATK). And for equipment in terms of revenue hours per aircraft.
However, these headline measures have some fundamental shortcomings as described last month (see October page 96). They only tell part of the story, and, worse still, they may also result in the wrong conclusions being drawn. The underlying issue is not necessarily how many physical units are delivered per aircraft or employee, but the revenue and ultimately the profit that each generates.
So, where to start in constructing a more meaningful productivity scorecard? The basic aim is to uncover the relationship between costs, productivity and the industry's overall financial performance. And if these measures are to be truly useful, then the rise they indicate in productivity should tally with the industry's overall financial fortunes. At present that appears not to be the case.
Labour element
Here, we focus on the labour element, although this is not an examination in isolation - rather it represents just part of an overall universe of new measurements. Also note that, for this analysis, Commerzbank and Airline Business have turned to the figures published by the International Civil Aviation Organisation (ICAO)and the International Air Transport Association (IATA). These give a reasonably good aggregate picture of the industry's performance and obey the tests of being relevant, consistent and meaningful. It is also important that any analysis looks at figures for a whole industry cycle, rather than simply dipping into a boom or bust phase. Here we look at a decade from1989 through to 1998.
For consistency we have also focused on the performance of flight and cabin crews only. That helps to avoid the distortions that can arise through the uneven levels of employment in airline ground departments or ancillary businesses.
Appropriate reward?
Over the period in question, the number of flying crew employed has increased in double figures, but the number of ATKs delivered has grown by just over 70%. In other words, the extra capacity has been delivered through a mix of greater input per employee and also a larger labour pool. One key question is: has the additional effort per employee has been appropriately rewarded? In fact, flight crew costs (wages and expenses) have risen faster than capacity, doubling over the period. This greater rate of increase could reflect a structural change in the industry. But it could equally reflect salary drift where there is a breakdown in the correlation between inputs and outputs.
To look at this in a slightly different way, take the history of three measures (see graph):nominal productivity (ATK per employee); nominal yield (revenue earned per ATK); and the rewards given to labour (crew labour costs as a share of revenues earned from flight operations).
At a first glance it appears that reported labour productivity is rising and this is being rewarded by a greater share of revenue accruing to labour. However, at the same time, yields have continued to fall. In fact, most observers agree that the industry continues to faces a real decline in yields of at least 1-2% a year after adjustments for inflation. In reality, yields have declined by some 4.5% over the cycle in question. So although the ATK per employee may have risen over much of the last decade, the revenue earned per employee has not.
Wage productivity
Perhaps a clearer way to look at the issue is to ask how much revenue has been generated for each of the dollars spent on labour. On this "wage" productivity measure the industry has not scored well. The ICAO figures show that in 1989, carriers were taking in flight revenue of $13.9 for each dollar of flight crew expense. By 1998 that had fallen to $10.6. This is, of course, a ratio and it is true that the yield fall has had a major impact. So flight revenues have not increased in line with capacity.
Such reasoning however, should not be allowed to obscure the underlying requirement that the cost base of any airline must be appropriate to its revenue stream. Airlines looking at headline physical productivity - ATKs per employee - would have boasted an increase over the past decade, significantly aided by larger aircraft, flying longer distances. Those looking at revenue productivity - monitoring the relation between labour costs and revenues - would have seen quite a different picture and perhaps a more accurate one. That is where the problem lies. If you focus on the wrong measure you get the wrong answer.
Source: Airline Business
